In early January, the Canadian Securities Administrators (CSA) published a long-awaited policy paper on investment fund fee structures that indicates the regulators are convinced that trailer fees and similar forms of third-party compensation inevitably distort securities industry incentives, impede competition and harm investors. The CSA paper also concluded that nothing short of a ban on these arrangements is likely to address the regulators’ concerns. Still, the CSA hasn’t definitively decided to ban embedded compensation. The regulators insist that they remain open to other possibilities. But devising those solutions most likely is up to the industry.
The CSA has evaluated – and discarded – its own ideas for addressing the problems posed by embedded commissions (which are set out in its 2012 consultation paper on the issue). The regulators also decided that more transparency isn’t the answer, and that their other ongoing reform efforts (a “best interest” standard and targeted reforms) are likely to fall short. So, if another option emerges that pre-empts an outright ban on trailers, that most likely needs to come from the industry.
Proposing an alternative is likely to get more traction with regulators than simply resisting reform. Although some industry players may be content to argue that a ban on embedded compensation will have negative effects – such as reducing access to financial advice – the regulators’ analysis rejects that conclusion.
A more constructive approach is for the industry to come up with answers to the core problems that regulators have identified with embedded commissions. There is precedent: in the industry’s early days, the fund industry itself addressed growing concerns about sales contests, lavish conferences and other dubious sales tactics. In that instance, the industry’s voluntary efforts to curb these practices formed the foundation of a national sales practices rule.
When the securities industry leads the way in addressing regulatory concerns, it’s well positioned to ensure that the ultimate result both satisfies regulators and is commercially viable. This allows the industry to present itself as progressive – and part of the solution rather than the problem.
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